The Chinese central bank just changed the logic of the stock market: Xu Gao
Beijing calls on sovereign funds to support Chinese stocks. Shanghai will spend half a trillion to boost services consumption.
Our briefing on critical economic and financial developments in China as of Friday, 4 October, 2024:
The Chinese central bank’s launch of new monetary policy tools to support equity investment has “changed the logic” of the A-share market, according to BOC International chief economist Xu Gao.
Beijing wants institutional investors including sovereign funds to play a greater stabilisation role for the Chinese stock market, by spurring them to provide more “long-term capital.”
The Shanghai municipal government plans to spend half-a-trillion yuan on vouchers to boost the consumption of services within the city.
Gao Shanwen from the China Finance 40 Forum looks to weak consumption as a key cause of lacklustre growth, advocating for widespread structural changes to the economy.
The Chinese central bank just changed the logic of the stock market - Xu Gao
The Chinese central bank's unveiling of monetary policy measures to provide support to domestic A-shares has fundamentally shifted the calculus of China's equities market, according to the chief economist from one of the country’s top investment banks.
The People's Bank of China (PBOC) - which is the Chinese central bank, recently announced the launch of two new structured monetary policy tools:
The "Securities Fund Insurance Swap Facility" (证券基金保险互换便利), and the
"The Share Buyback Increase Re-loan" (股票回购增持再贷款).
At a press conference held on 24 September, PBOC governor Pan Gongsheng (潘功胜) pointed in particular to the Securities Fund Insurance Swap Facility as a key support measure for the stock market.
“The funds obtained via this tool can only be used for investment in the stock market,” Pan said.
While the initial volume is for 500 billion yuan, Pan points to the potential for extension by another trillion yuan.
Xu Gao (徐高), chief economist at Chinese investment bank BOC International, writes that the move "to a definite extent changes the logic for the operation of the A-share market."
"The two new tools established by the central bank are like channels for directing liquidity into A-shares, “ Xu said.
While the move marks an overt form of direct intervention in the workings of the market, it is likely intended to boost the prominence and popularity of the Chinese equities sector so that it can pay a greater role in the financial system in future.
"In terms of China's aggregate financing of the real economy, the share of equity financing is very low," Xu points out.
From 2016 to 2023, in the wake of Shanghai's stock market slump, domestic equity financing of non-financial enterprises accounted for just 3% of aggregate social financing to the real economy.
This figure has since declined to just 0.7% for the first eight months of 2024.
"Because equity financing volumes are low, the rise and fall of China's stock market doesn't have a major impact on China's macro-economy," Xu points out. “In the past, it’s been the outcome of economic performance, instead of the cause of economic performance.”
The equity support policies arrive as part of a raft of monetary and credit loosening measures unveiled by PBOC at the end of September, amidst broader efforts by Beijing to boost the Chinese economy and achieve its 5% full year growth target.
These measures have driven a surge in both domestic and Hong Kong-listed shares. The ChiNext Index rose 37.62% in September, while the Beijing 50 Equity Index surged 34.6% and the Hang Seng Tech Index 33.45%.
The Shenzhen Composite Index rose 26.13%, the Shanghai STAR Board rose 25.67%, while the Shanghai and Shenzhen 300 Index rose 20.97%.
Beijing wants sovereign funds to step up long-term investment in Chinese A-shares
The Chinese central government wants sovereign funds and other institutional investors China to play a greater stabilising role for the domestic A-share market.
At a press conference held on 24 September, Wu Qing (吴清), the head of the China Securities Regulatory Commission (CSRC), called for driving more medium and long-term investment into the Chinese share market, from players including state-owned investors such as sovereign wealth fund Central Huijin.
Shortly afterwards at a meeting held on 26 September, the Politburo of China's Communist Party also made reference to the need to further bolster the health of the country's capital markets, by driving the participation of institutional investors with longer time horizons.
The meeting called for "vigorously guiding the entry of medium and long-term funds into the market, and opening up barriers to the entry of social welfare, insurance and asset management funds."
On the same date, CSRC and the Central Financial Office jointly issued the "Guidance Opinions on the Entry of Medium and Long-term Funds into the Market" (关于推动中长期资金入市的指导意见), with the goal of "further clearing up pain points and blockages" for long-term investors.
Leading Chinese finance analyst Pi Haizhou (皮海洲) highlights the three key focal areas for the opinions:
The establishment of a capital market ecosystem that nurtures and encourages long-term investment.
The vigorous development of publicly offered equity funds, and support for the stable and healthy development of privately offered securities investment funds.
Vigorous improvements to various accompanying policy systems for the market entry of medium and long-term funds.
The release of the measures coincided with a surge in China's A-share market from the end of September, driven by Beijing's announcement of a slew of long-awaited monetary and fiscal policy measures to boost flagging growth.
Shanghai to spend 500 million yuan on boosting services consumption
The Shanghai municipal government has recently decided to spend 500 million yuan on the issuance of vouchers to drive consumer spending on services within the city.
The vouchers will cover the four areas of food and beverage, accommodation, film and physical fitness.
The People's Daily reports that 360 million yuan in vouchers will be allocated to the food and beverage sector alone, providing subsidized discounts of up to 30% for consumer spending.
The move arrives after a meeting of the Politburo convened on 26 September called for "the integration of efforts to spur consumption with benefits to living standards," and "cultivating new forms of consumption."
China Finance 40 Forum says consumption should be the focal point for the transition in China's economic model.
A leading economist from one of China's top economic think tanks points to the country's post-Covid consumption slump as one of the primary weak points dragging on economic growth.
"At present, there is overall slowing of China's aggregate growth and weakening of aggregate demand," writes Gao Shanwen (高善文) from the China Finance 40 Forum.
"Achieving a transition in China's model is a vigorous means for driving economic growth and encompasses two main areas.
"The first is transitioning to a higher industrial structure, and the second is transitioning towards stronger drivers of consumption."
For this reason, Gao advocates that China's industrial structure gradually shift further towards high-end manufacturing and the modern services sector - a process he believes is already in place, given recent economic data and shifts in the Chinese capital market.
When it comes to domestic demand, Gao believes that the consumption capacity of working-age Chinese has weakness markedly as a result of the pandemic, and poses the greatest shock to further increases.
For this reason, Gao believes that appropriate consumption stimulus measures will entail "stabilizing the long-term expectations of the working age population, and making consumption growth the focal point for economic transition."